Asia-Pacific: Shanghai’s new economic experiment

Chuck Chiang, Vancouver Sun Columnist09.29.2013

A woman uses a mobile device to take photos on the Bund in Shanghai last. China will open its first free trade zone in an ambitious effort to transform its commercial centre into a global hub. One of the likely problems though is that the zone is 60 km distant from the downtown in the picture.

More than 30 years after a little fishing town on the Hong Kong border triggered a meteoric rise in China’s economy, Beijing officials are returning to the same model to provide the next spark in the nation’s transformation.

On Sunday, the new Shanghai pilot free trade zone launched with much fanfare. While the details of the operation of the new district are scarce, many are already trumpeting its potential for dramatically shifting the Asia Pacific economic dynamic — albeit not in the immediate future.

The free trade zone, a 29-square-kilometre tract of land in the southeastern part of the city, has been a hot topic in Asia and global financial circles for months. On Friday, Beijing formally announced the zone’s plans — to experiment with a convertible currency and a market environment where foreign firms can trade, invest and set up shop directly, with fewer restrictions than before.

The zone, as it is now planned, will also allow approved Chinese banks to conduct offshore business, while liberalizing the banking, shipping and service industries by foreign firms by lowering tariffs and removing certain regulations.

The Chinese yuan is at the centre of establishment of the zone. Although the currency is no longer traded at a fixed rate to the U.S. dollar, it remains heavily regulated in its allowed trading price range, which depends on a baseline pegged to a basket of foreign currencies.

However, with expanded economic might comes an evolution of the yuan — or, rather, global markets’ demand of it. According to a Bank of International Settlements survey released recently, the Chinese currency is now the world’s ninth most frequently traded currency, jumping from 17th in just three years. CNBC reported that $120 billion U.S. worth of Chinese yuan (also known as the Renminbi) changes hands in foreign exchange trading daily.

Other nations — the United States, in particular — have long argued China should stop restricting the free market pricing of its currency on the global market. China itself wants to elevate the yuan as an international reserve currency, but not at the cost of fluctuations and instability that comes with a completely convertible yuan across the entire country.

In the Shanghai free trade zone, Beijing can experiment with free-trade economics in a small district, with successful measures than being implemented across the country over a longer period of time.

This is not the first time China has used this model. Former Chinese leader Deng Xiaoping’s launching of the Shenzhen special economic zone in 1980 is commonly referred to as the launching point of the Chinese economic model seen today. That model, the United Nations estimates, lifted more than 600 million people out of poverty, according to a Bloomberg report.

But as China’s economy matures, its GDP growth has softened this year, and the wealth imbalances throughout the country continue to deepen. That is why Beijing’s new leadership is forging ahead with its reform-focused policies — of which Shanghai is one of the crown jewels.

The establishment of the free trade zone has already created some ripple effects: Bloomberg is reporting that the residential real estate sales in Shanghai — particularly those near the zone — has already climbed as much as 50 per cent compared to last year, with property price hikes as well. Meanwhile, many business elites in Hong Kong — the unquestioned primary entry point for foreign businesses into the Chinese market — are already calling for the city to step up its game, or risk losing its economic status if Shanghai succeeds.

(For the record, Hong Kong chief executive Leung Chun-ying told the South China Morning Post that Hong Kong’s status would not be threatened by Shanghai, given the territories’ western legal system.)

Success, however, is not guaranteed. The establishment of the Shanghai zone as a spur to transform China to a high-income nation faces numerous challenges, not the least of which is the current lack of details. While it offered clear objectives, Friday’s announcement from Beijing was vague in the exact policy measures that will make Shanghai’s zone different from previous efforts.

Meanwhile, there is concern that Shanghai’s zone may drain investments from other regions in China, while the zone’s location is also a challenge for officials: The zone is in the outskirts of Shanghai, some 60 kilometres away from the city’s current central business district — roughly the same distance from downtown Vancouver to Abbotsford. Some pundits say it will take some effort for companies in the zone to lure consumers away from a huge established business core.

Then there’s the Internet issue; a report from the South China Morning Post said Beijing may consider unblocking websites like Facebook and Twitter in the zone. Although Chinese domestic media has since denied this, the zone could potentially allow foreign companies to bid on licences to provide telecommunication services within the district.

Much of exactly what the Shanghai free trade zone is remains speculation. Officials said changes and new policies will be implemented gradually — likely to avoid the market instability a large, sudden change in market economics can bring. It will be those policies that determine whether Shanghai’s zone will become the new Shenzhen in economic history books.

Comments

We encourage all readers to share their views on our articles and blog posts. We are committed to maintaining a lively but civil forum for discussion, so we ask you to avoid personal attacks, and please keep your comments relevant and respectful. If you encounter a comment that is abusive, click the "X" in the upper right corner of the comment box to report spam or abuse. We are using Facebook commenting. Visit our FAQ page for more information.

Saskatoon loves its Christmas lights. The Enchanted Forest draws thousands of vehicles each week. The late Bob Hinitt worked for months building his light display, which drew thousands of cars each year to Wiggins Avenue. And Scott Lambie on Clinkskill Drive has continued the tradition with more than 70,000 dancing lights (up from 50,000 last […]

When it comes to gift giving, they say it’s the thought that counts. But many are wondering if Mayor Drew Dilkens was thinking at all when he gave Olympic superstar Michael Phelps — whose battles with booze are well known — a big bottle of Canadian Club whisky.

Almost Done!

Postmedia wants to improve your reading experience as well as share the best deals and promotions from our advertisers with you. The information below will be used to optimize the content and make ads across the network more relevant to you. You can always change the information you share with us by editing your profile.

By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.

Postmedia wants to improve your reading experience as well as share the best deals and promotions from our advertisers with you. The information below will be used to optimize the content and make ads across the network more relevant to you. You can always change the information you share with us by editing your profile.

By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.